Discussion on the Liquidity Fragmentation Issue in the Layer 2 Era

With Ethereum's shift towards Layer 2-centric scaling solutions and the rise of tools like RaaS, a large number of public chains are rapidly developing. Many entities hope to build their own chains to represent different interests and seek higher valuations. However, the emergence of numerous public chains has made it difficult for the ecosystem to keep up, leading to many projects facing setbacks early on.

With the help of OP Stack and ZK technology, several large trading platforms and tech companies have launched their own Layer 2 or proprietary chains. Nowadays, the cost of building and operating a chain based on OP Stack has significantly decreased, to about $10,000 per month.

The future will undoubtedly be an era of coexistence of multiple chains. Although these Layer 2 chains may choose EVM compatibility for interoperability, it is difficult to build applications and reach consensus on the same chain due to the large number of downstream applications from the Web2 entities behind them.

The current multi-chain ecosystem presents a new challenge: liquidity and state decentralization. As the existence of multi-chains is inevitable, interoperability becomes a field that must be explored and solved. Currently, there are many liquidity solutions, such as chain abstraction, intent, liquidation execution, native cross-chain, ZK sharding, etc., but their core essence is similar.

The widely recognized Cake architecture introduces the core components of cross-chain abstraction from top to bottom:

1. Application Layer: The layer where users interact directly, completely shielding the details of liquidity conversion.

2. Permission Layer: Users connect their wallets to the dApp and request quotes to fulfill their trading intentions.

3. Account Management and Abstraction Layer: It is necessary to adapt to the account management and abstraction system of different chains.

4. Layer 2: Responsible for receiving and executing user transaction intentions, the Solver role competes here to provide a better user experience.

5. Settlement Layer: The solving layer is an intermediary layer used to realize user intentions, including components such as oracles, cross-chain bridges, early confirmation schemes, and data availability.

Currently, there are various solutions on the market to address liquidity fragmentation, mainly including:

1. Centered on RaaS: Assist in building Rollup shared liquidity and state on the OP Stack by joining specific shared sequencers and cross-chain bridges.

2. Account-centric: Build a full-chain account wallet that supports signing and executing transactions across multiple blockchain protocols through "chain signature" technology.

3. Centered on the off-chain intent network: Users send intents to the Solver network, where Solvers compete with bids, providing the optimal completion time and transaction price.

4. Centered on the on-chain Liquidity network: build a Liquidity layer, on which applications are built to share full-chain liquidity.

5. Centered on on-chain applications: Build high liquidity applications by integrating large market makers or third-party applications.

Solving liquidity issues is an important proposition. If we can build an integrated liquidity platform, especially one that consolidates fragmented cross-chain liquidity, it will have enormous potential.

Some typical chain abstraction concept projects include:

INFINIT: Building DeFi RaaS services, providing the necessary components for protocols, with final liquidity placed on INFINIT's liquidity layer.

Khalani Network: Building three core components: Intent-compatible layer, Validity, and Universal Settlement Layer.

Liquorice: Decentralized applications that achieve auction-based price discovery and unilateral liquidity pools, focusing on the transaction itself.

Xion: Based on the Comet BFT consensus protocol, adopting the cross-chain communication method of Cosmos IBC.

=nil; Foundation: Proposes a zkSharding solution, using ZK technology to horizontally scale the Ethereum mainnet.

ERC-7683: Establish a universal standard for cross-L2 and sidechain operations to achieve seamless cross-chain execution.

OP Stack: By designing a complete set of multi Layer 2 solutions, it addresses the issues of information transmission and Sequencer decentralization.

Overall, the future will inevitably be one of multi-chain coexistence, and addressing the issue of fragmented liquidity is a challenge that the industry must face. The integration of liquidity across all chains has vast development potential and is expected to build key infrastructure for the Web3 era.